Not long before the 11th-hour settlement of the United States’ debt-ceiling crisis, results were released of a poll in which the public was asked the single word that, for them, best summed up the political wrangling. Two-thirds of respondents chose “ridiculous”.
Had the same question been asked of the international audience, the result is likely to have been very similar. Around the world people watched in disbelief as the time approached for one of the most successful nations in history to be brought to its knees. That such a catastrophe was averted by no means signals an end to that country’s financial woes.
The US currently borrows more than 40c of every dollar it spends. Its gross debt to GDP ratio is 96%. New Zealand’s is 32%. As part of the debt-ceiling deal, a bipartisan sub-committee with equal numbers of Republicans and Democrats has been established in Washington to recommend by late November a whopping US$1.5 trillion in spending cuts. That is designed to match a further increase in the debt ceiling of $1.5 trillion before the end of the year, which is due on top of the $900 billion just agreed. The sums are hard to comprehend, especially when taking into account that they have to come from an already weak economy where unemployment is rising and household spending is falling. No wonder ratings agency Moody’s has put the US on negative credit watch, noting that “attempts at fiscal rules in the past have not always stood the test of time”.
Higher global interest rates are one possible outcome of trouble in the world’s single largest economy. But that’s not all that is at stake for the international community. For all that has been said and written about the decline of US power and the rise of China, it is still to the US that countries look in times of trouble.
Only a few months ago, when Libyan leader Muammar Gaddafi started bombing rebel forces in that country, the US, under the name of Nato, led the air strikes aimed at protecting the rebels. Similar scenarios have been played out on many other occasions involving not only US leadership but also on-the-ground resources. It has been American taxpayers who have funded these excursions or, more correctly, a combination of US taxpayers and lenders, since almost half the money has had to be borrowed.
If the US continues to falter, and makes the kinds of cuts required to balance its books, who will fill the role of the world’s policeman that it has until now taken on, sometimes reluctantly, and at other times with an enthusiasm that has made other countries uncomfortable?
Most of the developed world is facing similar financial problems to that of the US. Years of profligacy have finally been sheeted home. It can certainly be argued that the inequality between nations will go some way to being ameliorated if developed countries have little or no growth for a few years while poorer countries catch up.
But such austerity rarely feels good to those who are living through it – and especially not for political parties with one eye on the polls and which, as in the US, are facing an election next year. Senators and congressmen from both sides of the US political divide need to be mindful that their differences should not override their responsibility to find pragmatic and sustainable solutions to help the US step back from its precarious position.
Making cuts is never easy and making cuts that are fair is even more difficult. Resolve is required and it is only to be expected that both international aid and defence budgets will take their share of hits. Like US taxpayers, other countries will watch nervously as spending decisions are made. A more humble US would not be a bad thing, but a US so crippled by its financial situation that money, or the lack of it, rather than morality dominates its international engagement, would be good for no one. That, too, would seem “ridiculous”.